Until last Wednesday, when the S&P 500 Index made new closing and intraday highs, uncertainty about potential long-term damage to the global economy from Covid-19, remained in denial, but that seemed to change last Thursday. The Market Review explains how the indicators became more cautious as safe-haven gold suddenly broke out to the upside and stole the show. Then another update to the SPDR S&P 500 ETF (SPY) put spread hedge section followed by an SPDR Gold Shares (GLD) idea to consider.

S&P 500 Index (SPX) 3337.75 dropped 42.41 points or -1.25% last week, after making a new closing and intraday high on Wednesday. The operative upward sloping trendline (USTL) from the October 3 low, and the 50-day Moving Average, now moving together at 3274 represent support, should SPX continue lower.

CBOE Volatility Index® (VIX) 17.08 gained 3.40 points or +24.85% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 3.22 points or +29.81 ending at 14.02% vs. 10.80% for the week ending February 14.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.     

With 17 trading days until March expiration, the day-weighted premium between March and April allocated 85% to March and 15% to April for a premium of .07%, barely in the yellow zone, vs. 11.84% on February 14. The volume-weighted alternative was only 6.77% when SPX made new closing and intraday highs on Wednesday as the entire futures curve flattened.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next futures expiration on Wednesday.

When the SPX made new highs last Wednesday the VIX remained higher at 14.38% reflecting increased hedging activity with the put/call ratio at 2.04, then on Friday the ratio increased to 2.08. High, but not alarmingly high.

Put Spread Hedge Report

SPDR S&P 500 ETF (SPY) 333.48 down 3.47 points or -1.22% for the week. Around mid-day last Thursday, it suddenly dropped 1.38% apparently on Covod-19 news. Since options implied volatility remained high the potential for a decline increased and when it suddenly headed lower it prompted this tweet: "$SPY down near 1% makes good reason for new put spreads now." Two more tweets followed Friday suggesting more put spreads. For more tweets, our handle: @ivolatility

Gold Breakout

As Covid-19 uncertainty increases, gold joins the rush into safe- haven assets.

SPDR Gold Shares (GLD) 154.70 gained 5.70 points or +3.83% last week after breaking out to close above 150 last Tuesday, closing higher every day including a gap open higher on Friday.

GLD is a proxy for gold bullion, representing fractional undivided interests in physical gold bullion and priced daily based on the London afternoon fix.

With an implied volatility index mean, IVXM of 14.08, at .65 of its 52-week range options are reasonable based upon the IV/HV ratio of 1.47.

Friday 681,731 option contracts traded compared to the weekly average of 395,170 contracts with narrow bid/ask spreads.

As an example, the April 156/158 long call spread (long April 156 call and short April 158 call) closed Friday at .65.

Consider the risk binary since if the rate of reported new Covid-19 cases suddenly declines, GLD could quickly return to 150.

WTI Crude Oil Follow-up

Adding to last week's suggestion in Digest Issue 7 "Crude Oil Oversold Bounce [Charts]" Friday, MarketWatch displayed a revealing chart produced by BofA Global Investment Strategy showing U.S energy stocks are at their lowest price relative to the S&P 500 index since the attack on Pearl Harbor in 1941.

Clearly oil and gas stocks are out of fashion on Wall Street, although at current prices in the 50s, many producing companies are generating positive cash flow.

From our friends at Barchart.com here is a seasonal chart update.

At 53.38 the April futures contract closed back above the 5-year seasonal average.

From being overly optimistic at the start of the year, Covid-19 managed to return crude oil prices back the 5-year seasonal average and then they bounced slightly.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge declines as soon as they begin developing since pullbacks can become corrections with something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Rather than waiting to see if a pullback will become a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If not needed, existing long portfolio positions will continue higher and the insurance protection can be cancelled. In addition, by watching and managing the put spread it will keep attention focused should the pullback develop into something more serious requiring even more put spreads.

Since there were signs of an imminent pullback last week consider SPY put spreads or collars for long individual stocks or ETFs by selling an out-of-the-money call and buying and out-of-the-money put with the sale proceeds.  

Summary

For several weeks, after paying little attention to potential long-term damage to the global economy from Covid-19, suddenly last Thursday the S&P 500 Index responded while gold and other safe haven assets attracting money flows all last week. The VIX remained high, the VIX futures spread narrowed and the put/call ratios increased. Since the level of uncertainty increased, the time has come again to consider SPY put spreads or collars on individual positions.